CREC056100 - Eligible expenditure: avoidance: general anti-avoidance provision
Section 1179CI Corporation Tax Act (CTA) 2009
Part 14A CTA 2009 includes a general anti-avoidance provision to prevent production companies from inflating the amount of Audio-Visual or Video Games Expenditure Credit (AVEC or VGEC) to which they are entitled.
Disqualifying arrangements
One effect of the provision is to exclude the production company from receiving an expenditure credit in respect of a production if it is party to disqualifying arrangements. The company cannot receive an expenditure credit for the accounting period in which the disqualifying arrangements are made, or for any future period of the same production. If previous claims have been made in respect of the production, those claims are withdrawn by amending the company’s tax return(s).
The normal time limit for amending a tax return does not apply where an amendment needs to be made for this reason – the legislation is in section 1179AC CTA 2009.
Disqualifying arrangements are arrangements of which the main purpose, or one of the main purposes, is to
obtain an expenditure credit to which the company would not otherwise be entitled, or
obtain a greater amount of expenditure credit than the company would otherwise be entitled to.
Example
A television production company hires an actor for £100k, but draws up a contract in which the total fee payable is set at £150k. The actor agrees to reinvest £50k in the programme in the form of a non-recourse loan to the production company.
The production company has no obligation to repay the loan from the actor and therefore this aspect of the contract has no commercial basis. Instead, the whole purpose of that part of the transaction was to gain an amount of expenditure credit which would not otherwise be available. The production company is party to disqualifying arrangements.
The production company claimed £175k credit in the previous accounting period, and plans to claim £120k for the accounting period in which the arrangement with the actor was made. Production is expected to continue into the next accounting period.
Because of the disqualifying arrangements, the production company is not entitled to any expenditure credit in respect of the programme. The £120k claim for the current period is invalid, and no future claim may be made in respect of the next accounting period. The £175k claim in respect of the previous accounting period must be withdrawn by amending the company’s tax return for that period.
End of example
You should consult Counter Avoidance in cases where you consider that the use of this provision might be warranted or where you suspect that you have identified artificial arrangements which have been entered into with the whole or main purpose of increasing the amount of AVEC/VGEC available.
Arrangements that are not disqualifying arrangements
HMRC recognises that, because AVEC and VGEC are designed to incentivise film, TV and video game production in the UK, companies will inherently make decisions and arrangements which allow them to qualify for relief or increase the amount of relief to which they are entitled. Where these arrangements do not conflict with the principles and policy objectives of Part 14A, they are not within the scope of disqualifying arrangements.
Example
A film studio based in the US is planning to produce a film set in Scotland, which will mostly be filmed on location there. Instead of running the project through its US company, the studio sets up an SPV company in the UK to be responsible for the whole production.
This allows the studio to receive AVEC via the SPV, which is the production company. If it had used a US-based company on the same project, it would not have been eligible for AVEC. However, the use of the SPV is not a disqualifying arrangement as this kind of inward investment is consistent with the intent of the legislation.
Note: to qualify for relief, the SPV must be responsible for the production, make decisions in relation to it and negotiate for contracts itself. It cannot merely be a shell that leaves all responsibility to the US company. See CREC010200.
Uncommercial arrangements
If a production company makes a transaction which is part of arrangements
that are not disqualifying arrangements, but
are not made for genuine commercial reasons, and
would result in an increase in entitlement to expenditure credit
then that increase in entitlement (known as the ‘relevant advantage’) is counteracted so that it no longer arises. This is done using just and reasonable amendments to the amounts which form part of the expenditure credit calculation.
The normal time limit for amending a tax return does not apply where an amendment needs to be made for this reason – the legislation is in section 1179AC CTA 2009.
Uncommercial arrangements would arise where a production company did not make the arrangements with the purpose (or a main purpose) of receiving inflated credit, but it has nevertheless made uncommercial transactions which directly or indirectly lead to an increased entitlement to credit.